Vanguard Variable Annuity
The Contract is intended for long-term investors who want tax-deferred accumulation of funds, generally for retirement but also for other long-term investment purposes. The tax-deferred feature of the Contract is most attractive to investors in high federal and state marginal tax brackets who have exhausted other avenues of tax deferral, such as pre-tax contributions to employer-sponsored retirement or savings plans. The tax-deferred feature of the Contract is unnecessary when the Contract is purchased to fund a qualified plan.
The minimum initial investment in the Vanguard Variable Annuity is $5,000. The minimum investment for each subaccount is $1,000. The minimum subsequent investment is $250. Regular contributions (monthly, quarterly, semi-annually, or annually) in the amount of $50 to $100,000 can be made to the variable annuity account through a service called "Annuity Express".
The Vanguard VA offers the following investment choices:
|Fixed Income||Balanced||Index Stock||Active Stock|
Like all variable annuities, the Vanguard VA has both insurance related and investment management related costs. There are no commissions or surrender charges. However, for contracts valued at less than $25,000 there is a $25 per annum maintenance fee. The breakdown of insurance related costs include:
- An annual administrative fee of 0.10%.
- An annual mortality and expense risk fee of 0.19%.
The VA offers two enhanced death benefit options (one can select these when first purchasing the VA) for the following additional costs:
- A return of premium death benefit of 0.05%.
- An annual step-up death benefit option of 0.12%.
- Return of premium. Under this option the mortality and expense risk charge is 0.245% and the heirs receive whichever is greater: the accumulated value of the annuity or the sum of the owner’s contributions to the annuity (minus adjusted withdrawals and any premium taxes).
- Annual step-up. Under this option the mortality and expense risk charge is 0.315% and the heirs receive whichever is greater: the accumulated value of the annuity, the sum of the contributions (minus withdrawals and any premium taxes), or the annuity’s highest accumulated value recorded on any contract anniversary up to age 80, plus any subsequent contributions (minus adjusted withdrawals and any premium taxes). </ref>
- A Guaranteed Lifetime Withdrawal Benefit (GLWB) rider for an annual fee of 1.20%. [note 1]
Subaccount investment management fees range from 0.07% to 0.52%. The average subaccount ER is 0.29% compared to the average mutual fund ER of 0.30%. (9/31/2011). See Vanguard variable annuity costs for details on comparative costs.
Including insurance costs, the Vanguard Variable Annuity has an average expense ratio of 0.59% compared to the annuity industry average of 2.42%.
Vanguard has had a history of reducing both the annual mortality and expense risk fee and subaccount management fees as the annuity attains economy of scale.
The Vanguard VA's fiscal year ends on 12/31 of each year.
In an effort to thwart market timing in the variable annuity subaccounts, Vanguard restricts exchanges between portfolios to two round trip exchanges per year. However, the annuity provides a number of automatic investment management techniques which may prove suitable to many investors. These services include:
- Dollar cost averaging: The Vanguard VA allows an investor in a non-qualified contract to automatically invest outside funds into the annuity on a monthly, quarterly, semiannual, or annual basis from a checking or savings account. Subaccounts must have a $1,000 minimum balance. The minimum automatic purchase is $50. The maximum is $100,000.
- Vanguard also allows an investor to set up an automatic exchange program between the subaccounts. Exchanges can be set up on a monthly, quarterly, semiannual, or annual basis. The subaccounts into which one is exchanging funds must have a $1,000 minimum balance. The minimum exchange is $250. These programs allow one to establish a dollar cost averaging investment program. Exchange Form.
- Automatic portfolio rebalancing During the accumulation stage of the VA, Vanguard allows an investor to establish a program which automatically rebalances the subaccount portfolios to a desired asset allocation. Rebalancing can be set on a monthly, quarterly, semiannual, or annual basis. Once again, the minimum subaccount balance for rebalancing must be $1,000. The minimum rebalancing exchange is $250. This service can be started, stopped, or changed at any time. Rebalancing Form.
Vanguard imposes no surrender charges on withdrawals from the contract. However, a 10% federal penalty tax may be imposed on withdrawals made before age 59½. Withdrawals can be made on either a non periodic basis or under a systematic withdrawal program.
- Non periodic withdrawals. You can make withdrawals of $250 or more at any time. For tax purposes, earnings are withdrawn first and nontaxable withdrawals of principal are made only when all earnings have been withdrawn.
- Systematic withdrawals. With systematic withdrawals you set up a regular schedule of portfolio withdrawals, either a set dollar withdrawal or a fixed percentage withdrawal.For tax purposes, earnings are withdrawn first and nontaxable withdrawals of principal are made only when all earnings have been withdrawn. To be eligible for this service, your annuity must meet minimum balance requirements of $10,000 for the annuity and $1,000 per portfolio. Form for setting up Systematic Withdrawals
Guaranteed lifetime withdrawal benefit (GLWB)
|Balanced Fund||Conservative Allocation Fund||Moderate Allocation Fund|
Table 3. provides the annual withdrawal percentages available with the GLWB rider.
|Attained age at first withdrawal||Single withdrawal percentage||Joint withdrawal percentage|
|0 - 59||0.00%||0.00%|
|59 - 64||4.50%||4.00%|
|65 - 69||5.00%||4.50%|
|70 - 79||5.50%||5.00%|
The contract provides four annuitization options. You can annuitize the contract at any time until age 95.
- Option 1: Life annuity. If you choose yourself as the “annuitant”—the person who receives payments—you’ll be guaranteed income for as long as you live. As the contract owner, you could also name someone else as the annuitant.
- Option 2: Joint and last survivor annuity. If there are two annuitants, such as you and your spouse, payments will continue as long as either of you is living. The survivor, or joint annuitant, can receive payments that are 100%, 75%, or 50% of the original amount.
- Option 3: Life annuity with period certain. You will receive payments for life, with payments guaranteed for a specific period, ranging from 5 to 30 years. If you die before the period ends, your designated beneficiary receives the remaining payments.
- Option 4: Period-certain annuity. You receive payments for a specific period, ranging from 5 to 30 years, as you choose. If you die before the period ends, your beneficiary receives the remaining payments. This option is available only with fixed payments.
The Vanguard VA allows one to select among either fixed options (funded from the insurer's general account and subject to the claims paying solvency of the insurer and variable options (which remained invested in the separate account and will fluctuate.)
- Option 1: Fixed payments. Under this option, you’ll receive the same payment amount every month for the length of the payment period, without adjustments for inflation.
- Option 2: Variable payments. This option lets you allocate your assets among a broad range of investment portfolios. The first payment will be based on an assumed interest rate (AIR) of 4%. Subsequent payments will vary, depending on how your investments perform. You can change your allocation, within certain limitations, without tax consequences.[See Immediate Variable Annuity - SPIA for details on immediate variable annuity payouts.]
- Option 3: Combination payments. You can combine the predictability of the fixed option with the growth potential of the variable option by allocating part of your assets to each.
- The rider fee for future premium payments into the designated GLWB investments could be higher or lower, but not more than the maximum of 2.0%.